Essays on monetary policy in small open economies

My dissertation consists of two empirical studies on the role of monetary policy characterized as inflation targeting. In particular, I investigate the extent to which the adoption of an explicit inflation target in the Czech Republic influenced the response of the central bank to changes in exchange rate dynamics and I analyze Australia's monetary policy via a simple, inflation targeting rule applying real-time, forward-looking data.;In the first essay I use a small structural vector autoregression model developed by Tanner (2001) and an exchange market pressure index (EMP) introduced by Girton and Roper (1977) to determine the stance of monetary policy in the Czech Republic for two distinct periods of monetary policy. During the fixed peg regime the relationship between EMP and policy is unidirectional as domestic credit creation and the interest rate differential are employed to maintain the exchange rate target. Under the inflation targeting/floating exchange rate regime exchange rate stabilization is not a policy priority. This finding indicates that "fear of floating" is not a feature of the Czech economy during this period as the central bank is focused on an inflation target despite the fact that exchange rate "pass-through" matters for the development of inflation and future ERM II accession requires fixing the exchange rate at or near an equilibrium rate.;In the second essay I estimate Taylor rule reaction functions to assess the stability of Australian monetary policy during the inflation targeting period. Real-time data are employed using a methodology developed by Nikolsko-Rzhevskyy (2007) which replicates U.S. Greenbook forecasts. The results indicate that the Reserve Bank of Australia is forward-looking and focuses on inflation development two quarters ahead. Contrary to de Brouwer and Gilbert (2005), the RBA responds to movements in the effective exchange rate and to developments in US monetary policy when real-time data is employed. Also contrary to de Brouwer and Gilbert (2005), backward-looking rules with lagged inflation and output gap measures described by quadratic detrending do not follow the Taylor principle as the inflation response coefficient is less than unity and the Reserve Bank of Australia appears to accommodate inflation above the target.